Foreign PE firms on hunt for Korea Inc. with strong dollar

Foreign private equity firms have taken advantage of the strong dollar to dominate corporate acquisition deals in South Korea, adding to expectations that they will keep the competitive edge against local rivals in the market as long as the currency stays firm.

Five takeover deals out of the total seven priced at more than 500 billion won ($352.6 million) have been done with foreign PE firms so far this year, according to The Korea Economic Daily on Tuesday.

In April, US PE firm Bain Capital bought a majority stake in South Korea's medical aesthetic device manufacturer Classys Inc. for 670 billion won, while Hong Kong-based Baring Private Equity Asia purchased the world’s largest polyimide film manufacturer PI Advanced Materials Co. at 1.3 trillion won.

Canada’s Brookfield Asset Management acquired SK Materials Airplus Inc.’s industrial gas facility at some 1 trillion won. US private equity giant The Carlyle Group was selected as a preferred bidder along with South Korean energy-to-retail conglomerate GS Group for the world’s third-largest 3D dental scanner maker Medit Corp.

In June, Hahn & Co. took over SKC Ltd.’s plastic film business at 1.6 trillion won, but foreign investors were seen behind the deal as the local PE firm raised funds in dollars from overseas limited partners (LP), said industry sources in Seoul.

“The dollar has surged some 20% against the won so far this year, helping foreign PE firms secure price competitiveness by that much when they bid for M&A deals,” said a source at a major domestic PE firm. “Foreigners are expected to keep dominating the local M&A market for a significant period of time.”

STRONG DOLLAR IMPROVES FOREIGNERS’ COMPETITIVE EDGE

Overseas PE firms accelerated acquisitions of local companies as the dollar has extended gains its against the South Korean won currency. Last month, the greenback hit the highest level since the 2008-09 global financial crisis.

Singapore-based Keppel Infrastructure completed the acquisition of South Korea’s leading waste management company EMK Co. for 760 billion won in October. Industry sources were surprised by the sale value at some 20 times earnings before interest, taxes, depreciation and amortization (EBITDA) as it was seen as excessive despite the waste management company’s growth potential, given the recent soured market sentiment amid rising interest rates and other bearish factors.

The infrastructure arm of Singaporean conglomerate Keppel Corp., which manages $5 billion in assets, could make such a bold bet thanks to a strong US dollar, industry sources in Seoul said.

Keppel Infrastructure was estimated to have paid $539.4 million for the acquisition, based on calculations assuming the won’s value of 1,400 per dollar. It may have had to spend $686.5 million earlier this year when the company was put up for sale, based on calculations assuming the won’s value of 1,100.

Brookfield’s deal on SK Materials Airplus Inc.’s industrial gas facility was also concluded last month, which allowed it to save more than $200 million thanks to the dollar’s strength, industry sources estimated.

South Korean PE firms were at the end of their rope as most of their LPs are local pension funds that inject money in Korean won, industry sources said. The local PE firms also struggled for money for takeover deals as interest rates on acquisition financing surged to higher than 8% per annum.

Foreign PE firms are predicted to keep dominating the local acquisition deals if the dollar stays firm, helping them maintain price competitiveness against domestic rivals, sources said.

“The gap between the haves and have-nots is likely to widen in local M&A markets if the dollar remains strong,” said one of the sources.

Write to Chae-Yeon Kim at why29@hankyung.com
Jongwoo Cheon edited this article.